RBI may keep rates unchanged

April 20, 2009 18:39 IST

In the light of credit offtake not picking up despite ample liquidity in the system, the RBI is likely to keep policy rates unchanged in its annual monetary policy, to be unveiled on Tuesday, but may impress upon banks to step up lending to sectors slowing down.

The RBI has given enough indication to banks to ease rates in response to a series of policy rate cuts undertaken to ease liquidity pressure and step up growth.

As recently as two weeks ago, RBI Governor D Subbarao at a seminar had said, "The response of (the) banking system (to the policy actions) has been positive ... But banks are yet to respond as much as warranted by the policy."

According to Uco Bank Chairman and Managing Director S K Goel, "I think (the) RBI is unlikely to alter policy rates. It would rather maintain (the) status quo this time." He, however, expects the apex bank to advise all banks to ease rates in step with policy rate cuts so far post the Lehman crisis.

Indian Bank Chairman and Managing Director M S Sundararajan said there is enough liquidity in the system and the RBI would like to ensure adequate credit flows to productive sectors.

After reaching a peak of 29.4 per cent (Rs 5,82,344 crore) on a year-on-year basis as on October 10, 2008, non-food credit growth has declined sharply.

The repo rate, the rate at which the RBI lends short-term funds to commercial banks, has been reduced from 9 per cent in October to 5 per cent now.

Similarly, the reverse repo, the rate at which banks park overnight funds with RBI, has been brought down from 6 per cent to 3.5 per cent.

Non-food bank credit growth decelerated to 19.7 per cent (y-o-y) as on February 13, 2009, compared with 22.7 per cent as on February 15, 2008, as credit expansion during the period between December 19, 2008, and February 13, 2009, at Rs 8,091 crore was sharply lower than the Rs 86,978 crore in the corresponding period of the previous fiscal.

Since October, the RBI has reduced the percentage of deposits kept with the apex bank, called the cash reserve ratio, to 5 per cent from 9 per cent at the end of July 2008.

As a result of various measures taken by the RBI, it has infused over Rs 4,00,000 crore(Rs 4000 billion) into the system.

Whatever signal the RBI gives banks would follow, Sundararajan said, adding, banks will be responsive this time also, as in the past.

While bankers feel that the RBI would maintain the status quo, there is expectation of policy rate cuts in May.